University of Moratuwa MBA in Management of Technology Department of Management of Technology

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Subject Code: MN - 5205 Subject: Economics for Business

Lecturer: Prof. Sarath Dasanayake

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CASE STUDY - 4

By R M M U Karunarathne H M S S Bandara S A Lekamge D S A Edirisuriya J A D U D Jayalath 119014D 119002N 119018T 119006F 119010L

This assignment is submitted as a part of course work of the subject Technology Management: Principles and Strategies for MBA in Management of Technology University of Moratuwa Sri Lanka

21 May 2011

MN - 5205

Case Study -4

Table of Contents
Page Number List of Figures ________________________________ _______________________________1 Abbreviations ________________________________ ________________________________1 1 2 3 4 5 Question - 1 ________________________________ ______________________________2 Question 2 ________________________________ _____________________________2 Question - 3 ________________________________ ______________________________2 Question - 4 ________________________________ ______________________________3 Question - 5 ________________________________ ______________________________3

REFERENCES ________________________________ ______________________________5

List of Figures
Page Number

Abbreviations

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Case Study -4

Question - 1

Do managers often find it difficult to minimize the cost? If so, why? When we consider about this railroad example they have a problem of maintaining adequate control because of their number and their distribution over a large area. For an example railroad use in this case study has about 200 freight yards are scattered along approximately 12000 miles of track. So it is impossible to for any team manager to have each day a reasonably complete knowledge of what happened at each yard. So they examine selected data considering the performance of the yard during the day, and somehow evaluate a yards performance. In evaluating performance, one piece of information that is used is the costs incurred in the yard during the day the day. The data and techniques used for evaluate the cost is not suitable. If managers dont have proper data and techniques to evaluate the cost then they dont have clear idea of the cost factors. If they dont have a clear idea of cost factors then its hard to minimize the cost.

Question 2

Can control charts of the sort described in this case help managers to minimize the costs? If so, how? The control chart contains the deviation of the actual cost from the cost that would be expected on the basis of the average relationship between cost and output. These deviations can be used to detect days when costs are suspiciously high or low. When managers find the days which cost is suspiciously high or low then they can find out the reasons for the cost deviation. If the cost is low and the reasons for cost deviation are acceptable then they can use those things as practice to reduce the cost. If the cost is high and the reasons for cost deviation are acceptable then they can avoid those factors in future as a practice. So using control charts manages can minimize the cost.

Question 3

Is equation 1 a short-run or long-run cost function? Why? The equation used to calculate expected cost is short-run
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Case Study -4

Ci = 4,914 + 0.42Si + 2.44Di Where Ci = expected cost on i th day Si = number of cut switched on the ith day Di = number of cars delivered on ith day Cost was calculated using only the number of cut switches and number of cars delivers. The changes of fixed charges such as repair cost, maintenance and storage cost, and vacation costs are excluded when considering the cost. Therefore, cost function used in this case study is a short-run cost function.

Question 4

What is the marginal cost of switching a cut? Marginal cost of switching a cut could defined as the change in the total cost brought about by a unit change of switching a cut while keeping number of cars delivered constant. MC (Switching a cut) = 0.42

Question - 5

What is the marginal cost of delivering a car? Marginal cost of delivering a car could defined as the change in the total cost brought about by a unit change of delivering a car while keeping number of switching cuts constant. MC (delivering a car) = 2.44

Question - 6

Does the average cost per cut switched exceed the marginal cost of switching a cut? Average cost per day = (7523+7464+6932+6550+7606+7757+7701) / 7 = 7361.86 Average switch cuts per day = (869+792+762+586+669+732+659) / 7 = 724.14
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Therefore, Average cost per cut switched = 7361.86 / 724.14 = 10.166 Hence, average cost per cut switched is exceeds the marginal cost of switching a cut

Question - 7

In what ways can these estimates of marginal and average cost be useful to railroad managers? Explain. When plot output with marginal cost and average variable cost is a same graph, there will be an output range overlapping marginal cost curve and average variable cost curve. This range is known as minimum efficient scale. In this region both marginal cost curve and average variable cost curves are get horizontal. In MES states that firm using economies of scales. In this case railroad managers shall try to find the minimum efficient scale for both variable, that is for switching a cut and delivering a car. To find this MES, it is required to find marginal cost for switching a cut and delivering a car. Also average cost per cut switched and average cost per cars delivered. Operating in MES allows rail managers to function in optimum cost and allows to compete in market with higher cost competitors.

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Case Study -4

REFERENCES
Worthington. I, Britton. C and Reese. A (2005) Economics for Business: Blending Theory and Practice, ISBN: 0273685600, Publisher: Pearson Education Limited.